<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File Number 1-2493
New Valley Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-5482050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. Second Street
Miami, Florida 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
As of May 9, 1997, there were outstanding 9,577,624 of the registrant's
Common Shares, $.01 par value.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996............................................. 3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996................................. 4
Consolidated Statement of Changes in Shareholders' Equity
(Deficit) for the three months ended March 31, 1997........... 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996................................. 6
Notes to the Quarterly Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
SIGNATURE........................................................................... 17
</TABLE>
<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
----------------- -----------------
1997 1996
----------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 54,482 $ 57,282
Investment securities available for sale....................... 40,291 61,454
Trading securities owned....................................... 21,836 29,761
Restricted assets.............................................. 2,109 2,080
Receivable from clearing brokers............................... 19,507 23,870
Other current assets........................................... 11,019 9,273
--------- ---------
Total current assets...................................... 149,244 183,720
--------- ---------
Investment in real estate.......................................... 257,649 179,571
Investment securities available for sale........................... 2,974 2,716
Restricted assets.................................................. 6,655 6,766
Long-term investments, net......................................... 12,917 13,270
Other assets....................................................... 28,903 20,497
--------- ---------
Total assets.............................................. $ 458,342 $ 406,540
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities....................... $ 41,991 $ 44,888
Prepetition claims and restructuring accruals.................. 16,864 15,526
Income taxes................................................... 19,002 18,243
Securities sold, not yet purchased............................. 21,006 17,143
Note payable to related party.................................. 33,500 --
Current portion of notes payable and long-term obligations .... 22,728 2,310
--------- ---------
Total current liabilities................................. 155,091 98,110
--------- ---------
Notes payable...................................................... 157,827 157,941
Other long-term obligations........................................ 18,386 12,282
Redeemable preferred shares........................................ 221,753 210,571
Shareholders' equity (deficit):
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $121,502 and $115,944................. 279 279
Common Shares, $.01 par value; 850,000,000 shares authorized;
9,577,624 shares outstanding................................ 96 96
Additional paid-in capital..................................... 634,731 644,789
Accumulated deficit............................................ (732,195) (721,854)
Unearned compensation on stock options......................... (1,008) (731)
Unrealized gain on investment securities ...................... 3,382 5,057
--------- ---------
Total shareholders' equity (deficit)...................... (94,715) (72,364)
--------- ---------
Total liabilities and shareholders' equity (deficit)...... $ 458,342 $ 406,540
========= =========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1997 1996
--------------------- --------------------
<S> <C> <C>
Revenues:
Principal transactions, net................................ $ 2,499 $ 8,738
Commissions................................................ 3,393 3,863
Real estate leasing........................................ 6,282 5,706
Interest and dividends..................................... 1,541 5,184
Other income............................................... 6,038 8,494
-------- --------
Total revenues......................................... 19,753 31,985
------- -------
Cost and expenses:
Operating, general and administrative...................... 24,267 33,654
Interest................................................... 3,862 4,524
Provision for loss on long-term investment................. 3,796 --
-------- ---------
Total costs and expenses............................... 31,925 38,178
------- -------
Loss from continuing operations before income taxes
and minority interest...................................... (12,172) (6,193)
Income tax provision (benefit).................................. 50 (100)
Minority interests in loss from continuing operations
of consolidated subsidiary................................. 1,009 481
-------- ---------
Loss from continuing operations................................. (11,213) (5,612)
Discontinued operations:
Income from discontinued operations........................ 872 728
-------- ---------
Net loss........................................................ (10,341) (4,884)
Dividend requirements on preferred shares....................... (15,980) (15,462)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased....................... -- 4,279
--------- --------
Net loss applicable to Common Shares............................ $(26,321) $(16,067)
========= ========
Loss per common share:
Continuing operations...................................... $ (2.84) $ (1.76)
Discontinued operations.................................... .09 .08
--------- ---------
Net loss per Common Share.................................. $ (2.75) $ (1.68)
========= =========
Number of shares used in computation............................ 9,578,000 9,578,000
========= =========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Class B Compensation
Preferred Common Paid-In Accumulated on Stock Unrealized
Shares Shares Capital Deficit Options Gain
--------- ------ ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............ $279 $96 $644,789 $(721,854) $ (731) $ 5,057
Net loss........................... (10,341)
Undeclared dividends and accretion
on redeemable preferred shares... (10,422)
Unrealized loss on investment
securities....................... (1,675)
Adjustment to unearned
compensation on stock options.... 364 (364)
Compensation expense on stock
option grants.................... 87
---- --- -------- --------- -------- --------
Balance, March 31, 1997............... $279 $96 $634,731 $(732,195) $ (1,008) $ 3,382
==== === ======== ========= ======== ========
</TABLE>
See accompanying notes to Quarterly Consolidated Financial Statements
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NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $(10,341) $ (4,884)
Adjustments to reconcile net loss to net
cash provided from (used for) operating activities:
Income from discontinued operations................................... (872) (728)
Depreciation and amortization......................................... 2,009 1,090
Provision for loss on long-term investment............................ 3,796 --
Stock based compensation expense...................................... 847 --
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ 14,541 (7,420)
Decrease (increase) in income taxes................................ 759 (3,473)
Increase (decrease) in accounts payable and accrued liabilities.... (12,634) 9,583
------- ----------
Net cash used for continuing operations.................................... (1,895) (5,832)
Net cash provided from discontinued operations............................. 373 797
--------- ----------
Net cash provided from (used for) operating activities..................... (1,522) (5,035)
--------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 23,193 8,627
Purchase of investment securities..................................... (3,963) (15,844)
Sale or liquidation of long-term investments.......................... 2,807 13,887
Purchase of long-term investments..................................... (4,400) --
Purchase of real estate............................................... -- (24,732)
Payment of prepetition claims......................................... (58) (508)
Return of prepetition claims paid..................................... 1,396 --
Decrease (increase) in restricted assets.............................. 82 (12,526)
Payment for acquisitions, net of cash acquired........................ (20,014) 1,915
-------- ---------
Net cash used for investing activities..................................... (957) (29,181)
-------- --------
Cash flows from financing activities:
Payment of preferred dividends........................................ -- (10,354)
Purchase of Class A preferred stock................................... -- (10,530)
Increase in margin loans payable...................................... -- 17,255
Prepayment of notes payable........................................... (114) --
Repayment of other obligations........................................ (207) (439)
---------- ----------
Net cash used for financing activities..................................... (321) (4,068)
--------- --------
Net decrease in cash and cash equivalents.................................. (2,800) (38,284)
Cash and cash equivalents, beginning of period............................. 57,282 51,742
------- -------
Cash and cash equivalents, end of period................................... $ 54,482 $ 13,458
======== ========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
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<PAGE> 7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and Subsidiaries (the "Company"). The consolidated financial
statements as of March 31, 1997 presented herein have been prepared by
the Company without an audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial position as of March 31, 1997 and the
results of operations and cash flows for all periods presented have been
made. Results for the interim periods are not necessarily indicative of
the results for an entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, as filed with the Securities
and Exchange Commission.
2. ACQUISITION
On January 31, 1997, the Company entered into a stock purchase agreement
(the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), a wholly-subsidiary of Brooke Group Ltd. ("Brooke"), a
related party through the ownership of an approximate 42% voting interest
in the Company. Pursuant to the Purchase Agreement, the Company acquired
10,483 shares (the "BML Shares") of the common stock of BrookeMil Ltd.
("BML") from Brooke (Overseas) for a purchase price of $55,000, consisting
of $21,500 in cash and a $33,500 9% promissory note of the Company (the
"Note"). The BML Shares comprise 99.1% of the outstanding shares of BML, a
real estate development company in Russia. The Note is collateralized by
the BML Shares and is payable $21,500 on June 30, 1997 and $12,000 on
December 31, 1997. On April 28, 1997, the Company paid Brooke (Overseas)
$3,500, representing a portion of the Note payment due on June 30, 1997,
together with accrued interest thereon.
BML is developing a three-phase complex on 2.2 acres of land in downtown
Moscow, for which it has a 98-year lease. In 1993, the first phase of the
project, Ducat Place I, a 46,500 sq. ft. Class-A office building, was
constructed and leased. On February 5, 1997, BML entered into an
agreement to sell Ducat Place I to one of its tenants for approximately
$7,500, which purchase price has been reduced to reflect prepayments of
rent, and consummated the sale on April 18, 1997. In 1995, BML began
construction of Ducat Place II, a 150,000 sq. ft. office building. Ducat
Place II has been substantially pre-leased to a number of leading
international companies with occupancy expected by July 1997. The third
phase, Ducat Place III, is planned as a 400,000 sq. ft. mixed-use
complex, with construction anticipated to commence in 1998.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
The acquisition was treated as a purchase for financial reporting
purposes and, accordingly, these consolidated financial statements
include the operations of BML from the date of acquisition.
The purchase price was allocated as follows: current assets of
approximately $9,000, investment in real estate of $79,200, other assets
of $8,800, assumption of current liabilities of $35,146 and long-term
liabilities of $6,854. Current assets consisted primarily of an asset held
for sale of $6,400 related to the estimated proceeds from the sale of
Ducat Place I, net of $1,100 in accrued closing costs. Liabilities
included a $20,400 loan to a Russian bank for the construction of Ducat
Place II. The loan, which matures $6,100 in April 1997 (paid with the
proceeds from the sale of Ducat Place I), $4,100 in July 1997 and $10,200
in October 1997, is collateralized by a mortgage on Ducat Place II. In
addition, the liabilities of BML included approximately $13,800 of rents
and related payments prepaid by tenants of Ducat Place II for periods
generally ranging from 15 to 18 months. Proforma operating results for the
three months ended March 31, 1997 and 1996 are not presented herein as the
historical operating results of BML are not material to the historical
operating results of the Company.
The Company is currently seeking long-term financing to replace the
$20,400 construction loan related to Ducat Place II due in 1997 and for
the development of Ducat Place III. There is no assurance that the
Company can obtain such financing particularly in light of the political
and economic risks associated with investments in real estate in Russia.
The components of the Company's investment in real estate at March 31,
1997 are as follows:
<TABLE>
<CAPTION>
U.S. BML Total
---- --- -----
<S> <C> <C> <C>
Land .................................. $ 36,162 $14,200 $ 50,362
Buildings............................... 146,799 65,000 211,799
Construction-in-progress................ 234 234
--------- --------- ---------
Total............................. 183,195 79,200 262,395
Less: accumulated depreciation......... (4,746) (4,746)
-------- --------- --------
Net investment in real estate..... $178,449 $79,200 $257,649
======= ====== =======
</TABLE>
3. DISCONTINUED OPERATIONS
During the fourth quarter of 1996, Thinking Machines Corporation
("Thinking Machines") adopted a plan to terminate its parallel processing
computer sales and service business. Consequently, the operating results
of this segment have been classified as discontinued operations, and the
quarterly results for 1996 have been restated. Accordingly, the financial
statements reflect the financial position and the results of operations
of the discontinued operations of Thinking Machines separately from
continuing operations.
Summarized operating results of the discontinued operations of Thinking
Machines for the three months ended March 31, 1997 and the two months
ended March 31, 1996 from the date of acquisition.
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<PAGE> 9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
-------- ------
<S> <C> <C>
Revenues..................................... $ 3,100 $ 4,699
======= =======
Operating income............................. $ 1,421 $ 1,186
======= =======
Income before income taxes and minority
interests................................. $ 1,421 $ 1,186
Minority interests........................... (549) (458)
-------- --------
Net income................................... $ 872 $ 728
======== ========
</TABLE>
In April 1997, Thinking Machines sold the remaining part of its
discontinued operations for $2,405 in cash which resulted in the Company
recording a gain on disposal of discontinued operations of approximately
$200.
4. INCOME TAXES
At March 31, 1997, the Company had approximately $95,000 of unrecognized
net deferred tax assets, comprised primarily of net operating loss
carryforwards, available to offset future taxable income for federal tax
purposes. A valuation allowance has been provided against the amount as
it is deemed more likely than not that the benefit of the deferred tax
assets will not be utilized. The Company continues to evaluate the
realizability of the deferred tax assets and its estimate is subject to
change. The income tax provision (benefit), which principally represented
the effects of state income taxes, for the three months ended March 31,
1997 and 1996, does not bear a customary relationship with pre-tax
accounting income principally as a consequence of the change in the
valuation allowance relating to deferred tax assets.
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a separate component of
shareholders' equity (deficit). The Company had realized gains on sales
of investment securities available for sale of $3,694 for the three
months ended March 31, 1997.
The components of investment securities available for sale at March 31,
1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
Marketable equity securities:
RJR Nabisco common stock................ $ 32,574 $ 1,696 $ 34,270
Other marketable securities............. 3,624 2,830 $ 433 6,021
--------- ------- -------- ---------
Total marketable equity securities... 36,198 4,526 433 40,291
Marketable debt securities (long-term)........ 3,685 711 2,974
-------- ---------- -------- ---------
Total securities available for sale........... 39,883 4,526 1,144 43,265
Less long-term portion of investment
securities.............................. (3,685) (711) (2,974)
--------- ---------- ------- ---------
Investment securities - current portion....... $ 36,198 $ 4,526 $ 433 $ 40,291
======== ======= ======= ========
</TABLE>
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<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
As of March 31, 1997, the long-term portion of investment securities
available for sale consisted of marketable debt securities which mature
in two years.
As of March 31, 1997, the Company, through a wholly-owned subsidiary, held
approximately 1.06 million shares of RJR Nabisco Holdings Corp. ("RJR
Nabisco") common stock with a market value of $34,270 (cost of $32,574).
Based on the market price of the RJR Nabisco common stock at May 9, 1997
($30.625 per share), no amounts are payable by the Company under any of
its profit sharing arrangements with respect to the RJR Nabisco common
stock.
6. LONG-TERM INVESTMENTS
At March 31, 1997, long-term investments consisted primarily of
investments in limited partnerships of $11,782 and an equity investment in
a corporation of $1,000. The Company has determined that an other than
temporary impairment in the value of its investment in a joint venture has
occurred and has written-down this investment to zero with a charge to
operations of $3,796 for the three months ended March 31, 1997. The fair
value of the Company's long-term investments approximates its carrying
amount. The Company's estimates of the fair value of its long-term
investments are subject to judgment and are not necessarily indicative of
the amounts that could be realized in the current market.
The Company is required under certain limited partnership agreements to
make additional investments up to an aggregate of $24,000. The Company's
investments in limited partnerships are illiquid and the ultimate
realization of these investments are subject to the performance of the
underlying partnership and its management by the general partners.
7. REDEEMABLE PREFERRED SHARES
At March 31, 1997, the Company had authorized and outstanding 2,000,000
and 1,071,462, respectively, of its Class A Senior Preferred Shares. At
March 31, 1997 and December 31, 1996, respectively, the carrying value of
such shares amounted to $221,753 and $210,571, including undeclared
dividends of $127,779 and $117,117, or $119.26 and $109.31 per share. As
of March 31, 1997, the unamortized discount on the Class A Senior
Preferred Shares was $5,312.
For the three months ended March 31, 1997, the Company recorded $759 in
compensation expense related to certain Class A Senior Preferred Shares
awarded to an officer of the Company in 1996. At March 31, 1997, the
balance of the deferred compensation and the unamortized discount related
to these award shares was $4,900 and $2,960, respectively.
8. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B
Preferred Shares into Common Shares, cumulatively amounted to $121,502
and $115,944 at March 31, 1997 and December 31, 1996, respectively. These
undeclared dividends represent $43.54 and $41.55 per share as of the end
of each period. No accrual was recorded for such undeclared dividends as
the Class B Preferred Shares are not mandatorily redeemable.
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NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
9. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
Those liabilities that are expected to be resolved as part of the
Company's First Amended Joint Chapter 11 Plan of Reorganization, as
amended (the "Joint Plan") are classified in the Consolidated Balance
Sheets as prepetition claims and restructuring accruals. On January 18,
1995, approximately $550 million of prepetition claims were paid pursuant
to the Joint Plan. The prepetition claims remaining as of March 31, 1997
of $16,864 may be subject to future adjustments depending on pending
discussions with the various parties and the decisions of the Bankruptcy
Court.
10. CONTINGENCIES
Litigation
----------
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in
the Delaware Chancery Court, by a shareholder of the Company. The suit
alleges that the Company's purchase of the BML Shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by the Company. The plaintiff seeks (i) a declaration that
the Company's directors breached their fiduciary duties, Brooke aided and
abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations are without merit, and it intends
to defend the suit vigorously.
The Company is also a defendant in various other lawsuits and may be
subject to unasserted claims primarily in connection with its activities
as a securities broker-dealer and participation in public underwritings.
These lawsuits involve claims for substantial or indeterminate amounts
and are in varying stages of legal proceedings. In the opinion of
management, after consultation with counsel, the ultimate resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
- 11 -
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
-------------------------------------------------
INTRODUCTION
The Company's Consolidated Financial Statements include the accounts of
Ladenburg Thalmann & Co. Inc. ("Ladenburg"), BrookeMil Ltd. ("BML"), Thinking
Machines Corporation ("Thinking Machines") and other subsidiaries.
On January 19, 1995, the Company emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors under
its First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan"). The Joint Plan provided for, among other things, the sale of the
Company's money transfer business and the payment of all allowed claims.
ACQUISITION
On January 31, 1997, the Company entered into a stock purchase agreement (the
"Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke (Overseas)"), a
wholly-subsidiary of Brooke Group Ltd. ("Brooke"), a related party through the
ownership of an approximate 42% voting interest in the Company. Pursuant to the
Purchase Agreement, the Company acquired 10,483 shares (the "BML Shares") of
the common stock of BrookeMil Ltd. ("BML") from Brooke (Overseas) for a
purchase price of $55,000, consisting of $21,500 in cash and a $33,500 9%
promissory note of the Company (the "Note"). The BML Shares comprise 99.1% of
the outstanding shares of BML, a real estate development company in Russia. The
Note is collateralized by the BML Shares and is payable $21,500 on June 30,
1997 and $12,000 on December 31, 1997. On April 28, 1997, the Company paid
Brooke (Overseas) $3,500, representing a portion of the Note payment due on
June 30, 1997, together with accrued interest thereon.
BML is developing a three-phase complex on 2.2 acres of land in downtown Moscow,
for which it has a 98-year lease. In 1993, the first phase of the project, Ducat
Place I, a 46,500 sq. ft. Class-A office building, was constructed and leased.
On February 5, 1997, BML entered into an agreement to sell Ducat Place I to one
of its tenants for approximately $7,500, which purchase price has been reduced
to reflect prepayments of rent, and consummated the sale on April 18, 1997. In
1995, BML began construction of Ducat Place II, a 150,000 sq. ft. office
building. Ducat Place II has been substantially pre-leased to a number of
leading international companies with occupancy expected by July 1997. The third
phase, Ducat Place III, is planned as a 400,000 sq. ft. mixed-use complex, with
construction anticipated to commence in 1998.
The acquisition was treated as a purchase for financial reporting purposes and,
accordingly, the Company's consolidated financial statements include the
operations of BML from the date of acquisition.
The purchase price was allocated as follows: current assets of approximately
$9,000, investment in real estate of $79,200, other assets of $8,800, assumption
of current liabilities of $35,146 and long-term liabilities of $6,854. Current
assets consisted primarily of an asset held for sale of $6,400 related to the
estimated proceeds from the sale of Ducat Place I, net of $1,100 in accrued
closing costs. Liabilities include a $20,400 loan to a Russian bank for the
construction of Ducat Place II. The loan, which matures $6,100 in April 1997
(paid with the proceeds from the sale of Ducat Place I), $4,100 in July 1997 and
$10,200 in October 1997, is collateralized by a mortgage on Ducat Place II. In
addition, the liabilities of BML included approximately $13,800 of rents and
related payments prepaid by tenants of Ducat Place II for periods generally
ranging from 15 to 18 months.
- 12-
<PAGE> 13
RESULTS OF OPERATIONS
Consolidated total revenues were $19,753 for the three months ended March 31,
1997 versus $31,985 for the same period last year. The decrease in revenues of
$12,232 is attributable primarily to the decrease in revenues of Ladenburg as a
result of a decline in net principal transactions of $6,239 and a decline of
$4,166 in other revenues.
For the first quarters of 1997 and 1996, the results of operations of the
Company's primary operating units, which include Ladenburg (broker-dealer), the
Company's U.S. office buildings and shopping centers and BML (real estate), and
Thinking Machines (computer software sales and service), were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------------- ----------
<S> <C> <C>
Broker-dealer:
Revenues............................................... $ 8,712 $19,117
Expenses............................................... 12,791 18,623
-------- ------
Operating income (loss) before taxes
and minority interest.............................. $ (4,079) $ 494
======== =======
Real estate:
Revenues............................................... $ 6,282 $ 5,706
Expenses............................................... 7,869 5,907
-------- -------
Operating loss before taxes
and minority interest.............................. $ (1,587) $ (201)
======== =======
Computer software sales and service:
Revenues............................................... $ 223 $ --
Expenses............................................... 2,922 1,236
-------- -------
Operating loss before taxes
and minority interest.............................. $ (2,699) $(1,236)
======== =======
Corporate and other:
Revenues............................................... $ 4,536 $ 7,162
Expenses............................................... 8,343 12,412
-------- -------
Operating loss before taxes
and minority interest.............................. $ (3,807) $(5,250)
======== =======
</TABLE>
Ladenburg's revenues for the first quarter of 1997 decreased $10,405 as
compared to revenues for the first quarter of 1996. Ladenburg's expenses for
the first quarter of 1997 decreased $5,832 as compared to expenses for the
first quarter of 1996 due primarily to a decline in performance-based
compensation expense.
Revenues from the real estate operations for the first quarter of 1997
increased $576 primarily due to $446 in revenues of BML from the date of
acquisition to March 31, 1997. Expenses of the real estate operations increased
$1,962 due primarily to $1,664 in expenses of BML from the date of acquisition
to March 31, 1997.
Thinking Machines had revenues of $223 for the three months ended March 31,
1997. Direct costs of these revenues were $84 for the period. Operating
expenses of Thinking Machines consisted of selling, general and administrative
of $2,004 and research and development of $918 for the three months ended March
31, 1997.
- 13 -
<PAGE> 14
For the first quarter of 1997, the Company's revenues of $4,536 related to
corporate and other activities consisted primarily of net gains on investments
of $3,694 and interest and dividend income of $790 as compared to net gains on
investments of $3,256 and interest and dividend income of $3,830 for the same
period in the prior year.
Corporate and other expenses of $8,343 for the first quarter of 1997 consisted
primarily of employee compensation and benefits of $2,737, and the $3,796
provision for loss on a long-term investment. Corporate and other expenses for
the first quarter of 1996 consisted primarily of employee compensation and
benefits of $1,723, expenses related to the investment in RJR Nabisco Holdings
Corp. ("RJR Nabisco") common stock of $6,063, and interest expense of $1,160.
Income tax expense for the first quarter of 1997 was $50 versus an income tax
benefit of $100 for the first quarter of 1996. The effective tax rate does not
bear a customary relationship with pre-tax accounting income principally as a
consequence of the change in the valuation allowance relating to deferred tax
assets.
DISCONTINUED OPERATIONS
Thinking Machines had revenues and operating income of $3,100 and $1,421,
respectively, for the first quarter of 1997 as compared to $4,699 and $1,186,
respectively, for the first quarter of 1996 related to operations that have
been classified as discontinued. The decline in revenues was due to the sale of
Thinking Machine's parallel processing computer sales operation in December
1996 which had revenues of $2,296 in the first quarter of 1996. In April 1997,
Thinking Machines sold the remaining part of its discontinued operations for
$2,405 in cash which resulted in the Company recording a gain on disposal of
discontinued operations of approximately $200.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $85,610 at December 31, 1996 to
negative $5,847 at March 31, 1997 primarily as a result of the purchase of BML.
The Company is required under certain limited partnership agreements to make
additional investments for an aggregate of $24,000.
During the first quarter 1997, the Company's cash and cash equivalents decreased
from $57,282 to $54,482 due primarily to the net cash paid for the BML
acquisition of $20,014 and the $4,400 paid for the long-term investments during
the period, net of sales of investment securities of $23,193.
The Company expects that its available working capital will be sufficient to
fund its currently anticipated cash requirements for 1997, including the
required payments on the Note issued in connection with the purchase of the BML
Shares and currently anticipated cash requirements of its operating businesses,
investments, commitments, and payments of principal and interest on its
outstanding indebtedness. The Company is currently seeking long-term financing
to replace the $20,400 construction loan related to Ducat Place II due in 1997
and for the development of Ducat Place III. There is no assurance that the
Company can obtain such financing particularly in light of the political and
economic risks associated with investments in real estate in Russia.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995 (the "Reform Act"), including any statements that may be
contained in the foregoing "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in this report and in other filings with
the Securities and Exchange Commission and in its reports to shareholders,
which represent the Company's expectations or beliefs with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the
Company.
- 14 -
<PAGE> 15
Each of the Company's operating businesses, Ladenburg, BML, New Valley Realty,
and Thinking Machines are subject to intense competition, changes in consumer
preferences, and local economic conditions. Ladenburg is further subject to
uncertainties endemic to the securities industry including, without limitation,
the volatility of domestic and international financial, bond and stock markets,
governmental regulation and litigation. BML's operations in Russia are also
subject to a high level of risk in light of Russia's substantial political
transformation from a centrally-controlled economy under communist rule to the
early stages of a pluralist market-oriented democracy. In connection therewith,
Russia has experienced dramatic political, social and economic reform although
there is no assurance that further reforms necessary to complete such
transformation will occur. The Russian economy remains characterized by, among
others, significant inflation, declining industrial productions, rising
unemployment and underemployment, and an unstable currency. In addition to the
foregoing, BML may be affected unfavorably by political or diplomatic
developments, regional tensions, currency repatriation restrictions, foreign
exchange fluctuations, a relatively untested judicial system, a still evolving
taxation system subject to constant changes which may be retroactive in effect,
and other developments in the law or regulations in Russia and, in particular,
the risks of expropriation, nationalization and confiscation of assets and
changes in legislation relating to foreign ownership. In addition, the system
of commercial laws, including the laws governing registration of interests in
real estate and the establishment and enforcement of security interests, is not
well developed and, in certain circumstances, inconsistent and adds to the risk
of investment in the real estate development business in Russia. BML and New
Valley Realty are additionally subject to the uncertainties relating to the
real estate business, including, without limitation, required capital
improvements to facilities, local real estate market conditions and federal,
state, city and municipal laws and regulations concerning, among others, zoning
and environmental matters. Thinking Machines is also subject to uncertainties
relating to, without limitation, the development and marketing of computer
products, including customer acceptance and required funding, technological
changes, capitalization, and the ability to utilize and exploit its
intellectual property and propriety software technology. Uncertainties
affecting the Company generally include, without limitation, the effect of
market conditions on the salability of the Company's investment securities, the
uncertainty of other potential acquisitions and investments by the Company,
developments relating to the Company's investments in RJR Nabisco, the effects
of governmental regulation on the Company's ability to target and/or consummate
any such acquisitions and the effects of limited management experience in areas
in which the Company may become involved.
Results actually achieved may differ materially from expected results included
in these statements as a result of these or other factors. Due to such
uncertainties and risks, readers are cautioned not to place undue reliance on
such forward-looking statements, which speak only as of the date on which such
statements are made. The Company does not undertake to update any
forward-looking statement that may be made from time to time on behalf of the
Company.
- 15 -
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 10 to the "Notes to the Quarterly Consolidated Financial
Statements" in Part I, Item 1 to this Report.
Item 3. DEFAULTS UPON SENIOR SECURITIES
See Notes 7 and 8 to the "Notes to the Quarterly Consolidated
Financial Statements" in Part I, Item 1 to this Report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the
first quarter of 1997:
<TABLE>
<CAPTION>
Date Items Financial Statements
---- ----- --------------------
<S> <C> <C>
January 31, 1997 2, 7 None
</TABLE>
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW VALLEY CORPORATION
(Registrant)
Date: May 15, 1997 By: /S/Robert M. Lundgren
---------------------
Robert M. Lundgren
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 54,482
<SECURITIES> 40,291
<RECEIVABLES> 19,507
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 149,244
<PP&E> 257,649
<DEPRECIATION> 0
<TOTAL-ASSETS> 458,342
<CURRENT-LIABILITIES> 155,091
<BONDS> 157,827
221,753
96
<COMMON> 279
<OTHER-SE> (95,090)
<TOTAL-LIABILITY-AND-EQUITY> 458,342
<SALES> 0
<TOTAL-REVENUES> 19,753
<CGS> 0
<TOTAL-COSTS> 31,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,862
<INCOME-PRETAX> (12,172)
<INCOME-TAX> 50
<INCOME-CONTINUING> (11,213)
<DISCONTINUED> 872
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,341)
<EPS-PRIMARY> (2.75)
<EPS-DILUTED> (2.75)
</TABLE>
